The Denver office market ended the first quarter of 2012 with an overall vacancy rate that fell to 13.1 percent. According to CoStar, the vacancy rate was down from the previous quarter of 13.2 percent. Net absorption was more than 1.6 million square feet, which included 900,000 square feet in the central business district (CBD), and 700,000 square feet in the suburban markets.
Sublease vacancies also declined from 950,000 square feet to 900,000 square feet. Overall rental rates averaged $19.98 per square foot for full-service buildings. Class A properties averaged $23.81 per square foot for full service, while Class B averaged $17.73 per square foot. Both these rental rates were both up slightly, while Class C buildings remained flat at $13.50 per square foot.
Leasing activity will continue to improve in 2012, with net absorption remaining positive throughout the entire market. The majority of submarkets are slowly shifting from markets that favor tenants to neutral markets with rental rate stability and decreased tenant concessions, including less free rent.
As you can see, the outlook continues to be positive. There are several major indicators that market fundamentals are strengthening activity with limited new supply on the horizon. Additions/development projects that are planned for the Denver market include Arrow Electronics’ relocation from New York to Denver, which will bring more than 1,250 new jobs to the area; The Trizetto Group’s $110-million worldwide headquarters in the Meridian International Business Center in Douglas County; and Opus Development Corporation’s 165,000-square-foot project. The Trizetto Group alone anticipates that it will bring up to 750 new jobs to the area during the next five years.
The strongest demand for office space has been in the CBD. This has resulted in a lack of large blocks of space for tenants that want to expand or relocate in this region, as no new speculative construction has occurred.
On the investment front, institutional investors are leading the way with trophy property acquisitions. Based on a recent quarterly report published by Jones Lang LaSalle, these all-cash transactions are in the 5 percent to 6 percent capitalization rate range.
Numerous trends are helping to dictate the office market. Job growth is improving and stabilizing. As unemployment rates continue to decline, the demand for space will slowly increase, causing consumer confidence to increase as well. Denver’s diverse economy has helped aid this stabilization of the marketplace.
The service and energy sectors lead the Denver office expansion in the CBD and lower downtown (LoDo) markets. Both large and small companies alike are looking to expand and/or open new offices.
There is also a continued flight to quality, with tenant’s moving from Class B to Class A buildings. More build-to-suit opportunities are on the horizon. Transit-oriented development zones, along with Union Station and Central Platte Valley, are leading the way in leasing activity. Denver is predicted to be fully recovered by the end 2012.
A recent analysis by the Brookings Institution shows metro Denver was rated first among large U.S. cities when it came to population growth in the 25- to 34-year-old age range between 2008 and 2010. Denver also ranked seventh on Penske Truck Rental’s list of the 10 most popular moving destinations in 2011, proving that the area’s popularity shows no signs of slowing down.
— Phillip A. Yeddis, senior broker, Unique Properties, LLC/TCN Worldwide in the Greater Denver area